March 25, 2004
The new forms are a significant improvement over the current information that an individual investor would get from their broker. However, the intended timing of their delivery is a concern. Providing the form after the transaction is not very helpful, since the investor has already spent the money on fees and commissions and would have to spend more money in transactions fees to get their money out of a high cost fund.
Requiring the form before the transaction will be slightly better, but the salesperson disguised as broker or financial consultant or investment advisor or whatever the firm calls their salespeople with a NASD Series 7 is still motivated to get the client to invest their money as soon as possible. Providing the form prior to the transaction might create a speed bump in the sales process but there are too many people who ignore written documents when making major purchases/investments already.
Also, there is the issue of the disclosure of things like 12b-1 fees along with the hidden costs of many mutual funds like higher trading costs due to high turnover of fund assets and the associated potential for tax liabilities. Information on 12b-1 fees is found in the prospectus, but the other information is not. Also, the prospectus for a fund will always disclose its performance versus a market benchmark, but performance figures do not always account for fees. Nor does the prospectus tell the investor that most actively managed funds do not outperform the market as a whole. So even if the investor receives the disclosures discussed in the proposed rule change and the already required disclosures in the prospectus and actually reads them, they still may not get the most out of their investments.
Finally, the proposed forms do not do a good job of identifying alternatives to high cost, load funds. The only time that investors are encouraged to look at alternatives is in the statement below:
Sometimes shares that do not have a front-end load have high fees -- which makes them more expensive for the long-term investor.
Unfortunately, this statement really only implies that the investor should look at other alternatives, without identifying them. In these cases, the investor will most likely ask their broker for other options, which are still likely to have the brokers best interests in mind.
In the end, requiring brokers to disclose how they make money is a good start, but until the financial services industry recognizes the long-term benefits of aligning the interests of their brokers with the interests of their clients, people are going to get fleeced.